BTC rejects $18K resistance after its rally

Key points:

• Investors are eagerly awaiting the Fed’s interest rate decision and a speech from Fed Chairman Jerome Powell as BTC prices opened in favor of the bulls.
• Until there is more clarity on economic policy in the world's largest economy, Bitcoin traders may be skeptical of continued price action, regardless of direction.
• A call-to-put ratio of 0.94 indicates a balance between $180 million of call (buy) open interest and $190 million of put (sell) options. However, with Bitcoin nearing $18,000, most bearish bets could become worthless.
• A best-case scenario for bulls would need to be above $19,000 to extend gains to $155 million by Dec. 16. Given the ongoing regulatory and contagion risks, this seems unlikely.
• For now, the bears could push BTC below $18,000 and avoid bigger losses.

On Dec. 14, Bitcoin topped $18,000 for the first time in 34 days, up 16.5% from its Nov. 21 low of $15,500. S&P 500 futures had risen 3% in three days, reclaiming prices at a key support level of 4,000.

BTC/USD index (orange, left) vs. S&P 500 futures (right). [TradingView]

Investors are eagerly awaiting the Fed’s interest rate decision and a speech from Fed Chairman Jerome Powell as BTC prices opened in favor of the bulls. Subsequent 50 basis point rate hikes and Powell's explanation of why the Fed would stick around gave investors good reason to doubt that BTC prices could sustain current gains, resulting in $370 million in options expiring on March 16th. 

Analysts and traders expect some easing of macro tightening. For those who don't know, the Fed increased its balance sheet from $4.16 trillion in February 2020 to a staggering $8.9 trillion in February 2022.

Since that peak, monetary authorities have been trying to unwind debt and exchange-traded funds (ETFs), a process known as tapering. However, the Fed's assets have shrunk by less than $360 billion over the past five months.

Until there is more clarity on economic policy in the world's largest economy, Bitcoin traders may be skeptical of continued price action, regardless of direction.

Bears place most bets below $16,500

Options open interest for the Dec. 16 expiry was $370 million, but the actual figure would be lower as shorts took surprise after a Dec. 14 spike to $18,000. These traders completely missed the mark, placing bearish bets between $11,000 and $16,500, which seems unlikely given the state of the market.

Bitcoin options open interest on December 16. [CoinGlass]

A call-to-put ratio of 0.94 indicates a balance between $180 million of call (buy) open interest and $190 million of put (sell) options. However, with Bitcoin nearing $18,000, most bearish bets could become worthless.

Few of these put (sell) options will be available if Bitcoin remains above $18,000 by 8:00 UTC on December 16. This discrepancy occurs because the right to sell Bitcoin at $17,000 or $18,000 is worthless if BTC is trading above that level at expiration.

Bulls can win up to $155 million

Below are the four most likely scenarios based on current price action. The number of call (bull) and put (bear) instrument bitcoin options contracts available for December 16 varies by expiration price. An imbalance in favor of each party represents a theoretical gain:

• Between $16,500 and $17,500: 1,400 calls vs. 1,200 puts. The end result is a balance between calls and puts.
• Between $17,500 and $18,000: 3,700 calls vs. 100 puts. The end result was in favor of a bullish (bull) instrument of $60 million.
• Between $18,000 and $19,000: 6,200 calls and 0 puts. The net result was $115 million in favor of a bullish (bull) instrument.
• Between $19,000 and $19,500: 8,100 calls and 0 puts. The net result was $155 million in favor of a bullish (bull) instrument.

This rough estimate takes into account puts used in bearish bets and calls exclusively for neutral to bullish trades. However, this simplification ignores more complex investment strategies.

For example, a trader can sell put options, effectively gaining positive exposure to Bitcoin above a certain price, but unfortunately, there is no easy way to measure this effect.

FTX Contagion Continues to Impact Markets

During a bear market, it is easier to have a negative impact on the Bitcoin price due to the flow of news and its huge impact on the cryptocurrency market.

Recent negative crypto news has included reports of U.S. court documents that revealed an “unfair” trading advantage by Alameda Research, a market maker and trading firm affiliated with bankrupt exchange FTX.

The CFTC alleges that Alameda Research has faster trade execution times and is not subject to the exchange’s “automated liquidation risk management process.”

A best-case scenario for bulls would need to be above $19,000 to extend gains to $155 million by Dec. 16. Given the ongoing regulatory and contagion risks, this seems unlikely. For now, the bears could push BTC below $18,000 and avoid bigger losses.